Everyone who is retired or considering retiring faces the question of whether they have enough money, especially now that few people have pensions that pay for life. This involves a number of unknowns, including how long they'll live, their investment returns and their living costs. But the biggest uncertainty is whether they'll need long-term care.

The Query

Following are excerpts from an email I recently received from a long-time client:

The only thing that frightens me is that I will run out of funds sooner than later. Let me reassure you first of all. I feel fine, in fact I’m in very good health, active, living independently, driving, traveling, socializing, etc etc. I’m now 88 years old (89 in January) and people “can’t believe how well I look”!

My portfolio is well invested so that I have a decent income in addition to the pension and I can afford to live well.My son is in charge of it and he is conservative and responsible. I have a long-term care insurance policy that I took it out long ago and which is reasonably priced ($1426/yr for 3 years coverage).

My mother’s last five years were spent in a nursing home and eventually Medicaid took care of her needs. It wasn’t the greatest, but she had dementia and I even hired an aide to be with her exclusively 4 hours a day five days a week ($10/hr) for those years. She died shortly before her 91st birthday, probably of Alzheimers - she didn’t recognize me anymore.

My first cousin who is 10 years younger than I, has Parkinsons and is currently in a long-term care facility. The cost of his stay is $17,000 a month out of pocket. That’s $204,000 a year. Ron Lieber, the New York Times author, talks about the cost being $250,000 a year. If I should ever need it, my money would all disappear after 5 or 6 years and nothing would be left for my kids. I worry most about my daughter who has not been able to find work for several years, has minimal savings and whose husband is undergoing chemo for a brain tumor. Her only back-up for her later years is what she inherits from me. There won’t be much left to divide between her and her brother if I should end up in a nursing home.

My Response

Here's what I wrote back to my client:

First of all, I wish all of my clients were doing as well as you. The area of MassHealth planning is indeed a conundrum. The odds are that given your health to date, your income, and your long-term care insurance you will not need so much care for so long that you will run through all of your money. But if you would rather not play the odds, the way to be certain money is left for your children, especially your daughter, is to transfer some to them now, either outright or through an irrevocable trust.

There are two main benefits to a trust: First, you can continue to receive dividends and interest on the money invested in the trust. Second, if you have appreciated stock in the trust, it will receive a step-up in basis at your death, avoiding any taxes on capital gain.

You can take the step of making a transfer, whether to trust or outright, now or upon the onset of illness or disability. Whenever you take this step, you will be ineligible for MassHealth for the subsequent five years. In almost all cases, when people begin to need care they don’t need 24/7 care from day one. So, if you waited to make a transfer until illness struck, your costs during the subsequent five years would be unlikely to be $250,000 a year. Your income and long-term care insurance would go a long way towards covering your costs at a lower level, permitting you to shelter funds down the road even if you took no planning steps today.

The Upshot

After discussion with my client and her son, we agreed that there was no need for her to take long-term care planning steps now. She is in good health. She's unlikely to need extensive care. She has good income and three years of long-term care insurance should she need care. While care costs can be as high as $250,000 a year, that is unusual and when it does happen it's most likely to be relatively short-term, at the end of life.

As I discussed in my response above, should my client begin to need care, she could transfer assets then, in effect as an insurance plan. The transfer would cause her to be ineligible for MassHealth for five years, but also make her eligible at the end of five years. In effect, it is insurance that she does not have to pay out-of-pocket for more than five years so that she can be sure to leave some funds for her daughter, even in the worst case scenario.

Like most of our clients, she is balancing, on the one side, her own need for financial independence and security that she can afford to pay for any care she may need with, on the other side, her desire to leave something to her children, especially her daughter who faces some financial challenges. Fortunately, she has enough funds, income and insurance so that she really does not have to make a choice. Clients with less in resources many only be able to assure they can leave funds to their children by transferring them sooner, rather than later, whether outright or in trust.